A Site Selection Web Exclusive,
January 2019

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'Invisible Chain'

A hard Brexit could have very hard consequences, says one global corporate location expert. A government leader says the chains that appear to bind the post-Brexit UK economy could instead be stronger links to global partners in trade and democracy.

As the public radio program Marketplace put it earlier this month, "Brexit is just around the corner, in March, with no deal in sight."

"A no-deal Brexit would be a catastrophe," Steven Armstrong, Ford Motor Co. Group Vice President and President, Europe, Middle East and Africa, told Automotive News Europe in November. A significant portion of cars made at Ford's German plant in Cologne and vans made at its plant in Kocaeli, Turkey, are shipped to the UK.

One European location consultant says the ultimate outcome, if no deal emerges in the UK Parliament next week, could be a disastrous deal for all.

The UK will lose 100,000 new jobs from foreign companies in a no-deal hard Brexit situation, says René Buck, president and CEO, Buck Consultants International (BCI). The location consultancy undertook an analysis of the UK's future attractiveness in case next week's discussions in the British Parliament result in a no-deal hard Brexit from the European Union (i.e. no deal on free flows of goods and services between the United Kingdom and the 27 EU member states). Among BCI's conclusions:

"The United Kingdom will not secure 100,000 jobs that American, Asian and European companies would have created over the next four years in new greenfield projects and expansions of existing UK operations."

"These investments and jobs will instead go to Germany, Ireland, the Netherlands and Central and Eastern European countries."

Attracting new foreign advanced manufacturing plants, European headquarters and first-time-in-Europe investors to the UK will become substantially more difficult. However, for financial, business and IT services companies, "the UK will remain one of the top locations in Europe."

That said, Frankfurt and others already have made headway. And niches such as fintech are looking for hedges as well. Invest Lithuania, for example, just comes right out and says it: "London's status as the financial capital of the Old World will become less relevant after Brexit, at least for banks and financial technology (fintech) players. UK-based financial services providers will soon lose the ability to serve customers in the EU, and many are already seeking a second home in mainland Europe."

René Buck, President and CEO, Buck Consultants International

Lithuania pictures itself as that ideal second home, due to flexible regulations and streamlined licensing, and Invest Lithuania says it's seen the Baltic country's number of fintech firms blossom from single-digit numbers at the time of the Brexit vote to more than 150 this past fall. Google Payment Lithuania UAB, for example, just received an Electronic Money Institution license from the Bank of Lithuania. The license — valid across the EU — will allow the company to issue electronic money, handle electronic money wallets, perform remittances, perform payment transactions, provide cash deposit and withdrawal services, and perform direct debit and credit transfers.

According to data gathered from regulatory bodies of different European countries, Lithuania recently was second only to Britain when it comes to Electronic Money Institution (EMI) licenses (40) and it isn't far behind when it comes to Payments Institution (PI) licenses, with 33.

New Jobs Not Created

BCI first analyzed the potential effects of Brexit on July 21, 2016, a month after British voters voted to leave the EU, when Site Selection published its own early analysis. The financial markets had reacted negatively, but the UK was still the fifth largest economy in the world. It's still No. 5 today (behind Germany and ahead of France). But Brexit preppers are poised for the worst.

"The result of Great Britain leaving the European Union will be tariffs on goods and services imported into the EU, as these apply to other non-EU members as well," BCI says. "Some examples: For cars it is 10 percent, for medicines 5 percent, and for certain financial services it is up to 40 percent. There is a chance that trade agreements between the UK and the EU are agreed upon which avoid or decrease these tariffs. But than the UK government has to break some of its 'Leave-EU' campaign promises."

The number of FDI projects in the UK climbed steadily after a brief post-Great Recession dip, but dropped in the most recent fiscal year, after the Brexit vote. FDI value and job creation, however, are robust.

Data courtesy of UK Department for International Trade

As the firm wrote in July 2016, "We expect the majority of the companies with UK operations will not wait for the uncertain outcome of at least two years of negotiations."

Immediately after the British referendum, BCI consultants assisted clients with Brexit assessment scans and contingency planning. By October 2018, the firm noted that in the previous 12 months companies already were implementing strategies, motivated by wishing to avoid import tariffs in a hard Brexit scenario, and wishing to avoid lines at borders and additional customs red tape.

Strategies include:

procurement from other suppliers/locations

relocating (parts of) operations from the UK to other European countries

setting up small distribution centers in the UK to serve the British market

According to data from the UK Department for International Trade, the number of new foreign projects in the UK has dropped already, down by about 10 percent in 2017 despite high global economic growth. Every year foreign companies create 75,000 new jobs on average in the UK.

However, even if the project tally is down, other FDI indicators are up. In June 2018, the UK government shared FDI statistics for its most recent fiscal year showing that 75,968 new jobs were created and that 15,063 were safeguarded, amounting to nearly 1,500 new jobs per week across the country. Overall the UK remained the No. 1 destination for inward investment in Europe, with the wholesale, food and drink, electronics and infrastructure sectors all seeing an increase in the number of new jobs.

"Two years since the EU referendum, the UK has record employment and seen an increase in new jobs as a result of inward investment," said UK International Trade Secretary Dr. Liam Fox, noting strong increases from firms in Germany, India and the United States. "As an international economic department, we continue to promote the strengths of the UK as a great inward investment destination, with an open, liberal economy, world-class talent and business-friendly environment."

An update in early December from the UK's Office for National Statistics (ONS) showed that FDI stocks in the UK had increased in value by 12.6 percent in 2017, with more than 300-percent growth in FDI stocks from India. Financial services accounted for nearly 29 percent of all attracted FDI in 2017.

"As we leave the European Union, Britain can draw encouragement from how Singapore’s separation from the Peninsula did not make it more insular but more open."

— UK Foreign Secretary Jeremy Hunt, in a speech in Singapore early this month.

Photo courtesy of UK Government

"As we prepare to leave the European Union, foreign investors from around the globe are as confident as ever investing in the UK," said Fox. "The significant rise in the amount of investment from Asia is evidence that the growing economies are important partners for the UK, relationships which I am committed to developing and deepening."

René Buck sees things a bit more darkly ... or more clearly:

"Official statistics for 2018 are not available yet, but the trend is clearly down, due to the uncertainty regarding the Brexit situation," says René Buck. "A disruptive Brexit will result in an acceleration of the decrease of new foreign investments. In the case of a 'no deal' hard Brexit, we forecast a 30-percent decrease of new jobs created by foreign investors. In the next four years that will cost the UK 100,000 not-created new jobs. If global conditions deteriorate and the UK economy, which will get an economic hit in 2019 and 2020, doesn't recover fast enough, this number will increase even more."

Who Gains?

BCI says foreign investors who want to set up new advanced manufacturing plants, distribution operations or headquarters for the European market will avoid Great Britain if next week's vote leads to a hard Brexit.

"For transportation of products imported or produced in the UK, a hard Brexit is very time- and money-consuming, and interrupts international supply chains," Buck says. "Germany and Ireland will be interesting for high-tech plants. Central and Eastern Europe will benefit from new manufacturing operations. The Netherlands and Belgium will be good alternatives for European distribution centers. For European headquarters, Frankfurt, Amsterdam, Berlin and Paris are favorable alternatives."

BCI believes the UK will stay attractive for companies who want to establish R&D and innovation centers, due to the country's top-notch academic excellence. Moreover, for internet-based, IT and software companies, the UK will remain attractive due to its diverse, talented workforce, the large UK market and those sectors' lower exposure to negative Brexit consequences. "London will remain a global magnet for financial and business services companies," BCI says.

But that's just a fraction of the whole, which could leave a gaping hole in the UK's global economic leadership.

"Foreign companies have for decades favored the UK as an investment location due to its combination of entrance to the European Union and a large domestic market, an overall favorable investment climate and the familiar English language," says BCI's René Buck. "With a hard Brexit, the UK loses its advantage of being a borderless part of one of the largest markets in the world."

Business leaders seeking fresh guidance as the Brexit landscape changes from day to day will find some assistance from the UK Government, where a portal for companies planning for a post-Brexit world asks you to answer a gauntlet of seven questions. Checking boxes related to several industry sectors and alluding to business that sells in the UK and abroad spits out a list of 83 relevant documents, including many whose titles include the appended words "if there's no Brexit deal."

As time marches inexorably toward 11 p.m. UK time on March 29, when Brexit will officially occur, it may behoove all parties, internal and external, to heed the words of British Foreign Secretary Jeremy Hunt, who spoke early this month at the International Institute for Strategic Studies in Singapore — the model city-state in the world region whence so much new FDI in the UK originates. On the eve of the bicentennial of Sir Stamford Raffles and William Farquhar landing in that faraway land, his remarks suggested a turnabout whereby Singapore could serve as a possible model for the UK going forward.

"Like Britain on 29th March this year, Singapore too faced an extraordinary challenge back on 9th August 1965 when it separated from its larger neighbor," Hunt recalled. "In [longtime Singapore Prime Minister] Lee Kuan Yew's famous words, 'Some countries are born independent. Some achieve independence. Singapore had independence thrust upon it.'
Yet his memoirs record how not everyone shared his anguish, least of all the investors who swiftly decided that 'independence was good for the economy.'

"By the second day, the value of almost all of Singapore's industrial stocks was climbing," Hunt continued. "And over the next five decades, Singapore's real per capita GDP would multiply 15-fold to reach $58,000 a head. Today, Singapore has risen to become the eighth richest country in the world per capita, surpassing Germany, France, Sweden and — though I whisper it softly — the United Kingdom.

"As we leave the European Union, Britain can draw encouragement from how Singapore's separation from the Peninsula did not make it more insular but more open," Hunt said. "In Lee Kuan Yew's phrase, 1965 marked the moment when Singapore plugged into the international economic grid.' "

The parallels are not uniform nor universal, he noted, "but there is much we can learn from Singapore, not least the excellence of its education system, the long-term investment in infrastructure and a strategic approach to how a nation sustains competitive advantage in the world."

A statue of King Richard the Lionheart, the crusader king, stands outside the Houses of Parliament, Westminster.

Running through a litany of threats to the international order — from Russia's annexation of Ukraine to the expulsion of Rohingya refugees in Burma — Hunt lamented a global retreat from democracy, and asked, "So where does post-Brexit Britain fit into this picture?"

"We are not a superpower and we don't have an empire," he said. "But we do have the fifth biggest economy in the world, the second biggest military budget in NATO, the third biggest overseas aid budget, one of the two largest financial centers, the global language, highly effective intelligence services and a world class diplomatic network, including permanent membership of the United Nations Security Council.

"We also have immense reserves of soft power," he said, "with three of the world's top 10 universities, 450,000 students from overseas in higher education, 39 million visits by tourists in 2017, and a global audience for our media, especially the BBC, measured in the hundreds of millions. Most importantly, in a world where it is rarely possible for one country to achieve its ambitions alone, we have some of the best connections of any country," including
a growing diplomatic and trade presence in Asia, where he noted the global center of economic gravity has been shifting since the 1980s.

The UK soon will "open a new mission to ASEAN headquarters in Jakarta, as we seek to strengthen our relationship with ASEAN after we leave the EU," he said, part of a worldwide diplomatic expansion effort. The UK is already the biggest European investor in Southeast Asia, with ASEAN trade of nearly £37 billion, and over 4,000 British companies employing more than 50,000 people in Singapore alone.

"And those connections are why Britain's post-Brexit role should be to act as an invisible chain linking together the democracies of the world," Hunt said, "those countries which share our values and support our belief in free trade, the rule of law and open societies."

Hunt said the United Kingdom will always be ready to work alongside likeminded countries — "and few in Asia are more likeminded than Singapore. So, as Lee Kuan Yew said, let us 'seek a maximum number of friends' and 'seize opportunities that come with changing circumstances.'

"The scale of the challenge," he said, "demands no less."

Adam BrunsManaging Editor of Site Selection magazine

Adam Bruns has served as managing editor of Site Selection magazine since February 2002. In the course of reporting hundreds of stories for Site Selection, Adam has visited companies and communities around the globe. A St. Louis native who grew up in the Kansas City suburbs, Adam is a 1986 alumnus of Knox College, and resided in Chicago; Midcoast Maine; Savannah, Georgia; and Lexington, Kentucky, before settling in the Greater Atlanta community of Peachtree Corners, where he lives with his wife and daughter.

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